A lot has happened in the last 2-2.5 years. The World experienced its second largest pandemic (CV19) since the Spanish Flue of 1918 (at least 50MM deaths worldwide), which to date has resulted in 0.5BN reported cases and over 6MM deaths. Governments worldwide stepped in to help, including providing fiscal stimulus and increasing money supply. For the US, this resulted in 40% of the US money supply being printed in the year 2020 alone! US Government debt has now passed the $30 trillion dollar mark and is growing (the US is now 8.5x leveraged, if unfunded liabilities are accounted for!!! – https://www.usdebtclock.org/). What ensued is not surprising – unemployment is at an all-time low at 3.6% as of 3-2022 (its lowest level since 1953) and inflation is at an all-time high at 8.5% (its highest level since it peaked at over 14% in the 1980s; and according to shadowstats.com, the actual inflation rate is closer to 16%).
The abundant liquidity and cheap debt coupled with overall population and job growth (which growth was more pronounced in locations with net migration growth like Florida, Georgia, Tennessee, and Texas) resulted in strong demand for both residential and commercial properties, leading to higher home prices, commercial valuations based on pro formas (vs. actuals), and further cap rate compression. This did not really help alleviate the already existing housing shortage, currently estimated at 4-5MM homes nationwide. And the commodity price spikes and worldwide supply chain constraints, which further pushed the cost of construction of new homes, have further exacerbated the home price valuations.
To help cool the high inflation rates off, among other measures, the US Federal Reserve, started slowly increasing the Fed Funds Rate in 3-2022 by 25 bps, then by additional 50 bps in 5-2022, and as of late by 75 bps…with more planned rate hikes by 2022 year end (at least as per the most recent announcements as of the time of this article).
How does this translate to the real estate markets today?
Needless to state, rates have started increasing. And while valuations continue to be based on pro formas (at least for now), thereby making bridge debt still the most common form of financing, lenders have started tightening lending terms by reducing leverage (LTV), increasing required reserves, and implementing required (vs. optional) interest rate hedge mechanisms. This has led to further return compression, now leading sellers to start adjusting their expectations too and reduce prices (in some cases by 10% from the initial whisper price).
How are we adjusting to the changing environment? How to win in this environment?
We continue to stay focused on multifamily, which historically has benefited from inflationary pressures and relative to other real estate asset classes continues to outperform on a risk adjusted basis (see our article for details). Based on our boots on the ground feedback, single family homes have seen a more pronounced slowdown in activity (reduction in number of offers submitted, days on market, or sale price adjustments or all of the above), making multifamily the darling on the market yet again.
We continue to stay core to our investment approach and acquisition criteria by focusing on primary and secondary markets with job growth and population growth. In addition, we implement sufficient operating reserves (in addition to the standard lender replacement reserves) and are more mindful of the opening leverage (70% max vs. 75-80% previously), which is also in line with prevailing current lender terms. We continue to avoid negative leverage (i.e. purchasing at a cap rate below the lender interest rate). And while rents continue to grow, we remain conservative in our long term assumptions, as the current wage growth rate continues to lag the rent growth rate, thereby raising affordability concerns and thus making such rent growth trends unsustainable in the long run (hence why value add deals also tend to fair better in volatile market environments).
While we continue to actively look for deals, we are patient. As stewards of our investors’ capital, we set realistic return expectations, underwrite conservatively (as discussed above) and are carefully curating only deals that will weather the storm and satisfy our clients’ return expectations. In the past 6-9 months alone, it took reviewing nearly 200 deals to identify the ones that meet our investment and acquisition criteria.
Below are samples of two recently closed deals that are estimated to deliver double digit returns for our investors.
11-units in Tampa, FL
145 units in Augusta, GA
For those who joined us in these deals, thank you for your trust! We look forward to optimizing profits and generating strong returns together. Specifically for the 145-unit deal we partnered with passive investors. We had an overwhelming amount of interest – we raised the capital needed within 72 hours of our investor presentation and unfortunately had to add people to a waitlist.
If you are interested in learning more about our next investment opportunity, please join our Investor Club. As we adhere to the SEC guidelines, we can only share these opportunities with existing investors.
What does the future hold?
Well, if we knew that with 100% degree certainty, we would be doing something else J However, at present our crystal ball tells us that the time of market turbulence will equate to time of opportunity. Deals that were purchased at aggressive prices, negative leverage, floating debt, and/or with little cushion, will likely come back to market due to distress. Deals that projected Yr 2-3 refi at low interest rates and were underwritten with nominal cushion, will likely come on the market too. We intend to capitalize on such opportunities while remaining true to our investment approach & acquisition criteria.
Should you have any questions or want to learn more about real estate investing or for an overview of our target markets, please reach out to firstname.lastname@example.org.
Disclaimer: The information presented does not constitute legal, accounting, tax, or individually tailored investment advice. Past results do not represent or guarantee future performance.